Budget statement - Minister's speech

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Thursday 13 December 2012

Budget statement by the Minister of Treasury and Resources (Billet XXVI) delivered to the States of Deliberation on Wednesday 12 December 2012

Mr Bailiff,

Dull. When it was published, 'Dull' was the first word I was going to use to describe this Budget. But I decided that probably was not how I wanted to my Board's first Budget to be remembered. So I opted for 'cautious' instead. Given the furore over the proposal to lower the mortgage interest relief cap, I am not sure that 'dull' would have been accurate in any event.

Sir, before I go any further, I must, in accordance with Rule 12(8) of the Rules of Procedure declare my interests. I have a mortgage which would be affected by Proposition 17 if passed unamended; I am a shareholder and director of one licensed fiduciary business and a consultant to another, both of which will become subject to the intermediate rate of income tax at 10%, if Proposition 16 is approved.

I am pleased to present the States Budget for 2013. In doing so, I should like to express my appreciation to my Board for their unanimous support of this Report.

There are three key principles that have underpinned preparation of the 2013 Budget. These are interdependent and explain why 'caution' was appropriate - particularly in an environment of ongoing weak economic growth.

The first key principle is to achieve the elimination of the budget deficit as soon as practicable but, importantly, in a measured and sustainable manner. Whilst we budget to have an operating surplus in 2013 on the revenue account of £24m, after capital transfers and spending, the deficit is budgeted to be £17million in 2013. This is a significant improvement over the revised forecast of £31million in 2012 (or £32 million if the HSSD States Report is approved.) This £17million includes a one-off transfer of £3million to the Strategic Development Fund - of which I shall say more later. So, the underlying deficit is £14million - a significant sum but this represents less than 4% of £372million revenue income. As Guernsey is experiencing a period of lower economic growth than that previously enjoyed, the key to eliminating the deficit is by reducing expenditure in real terms. The vehicle for delivering this in a sustainable, co-ordinated manner is the Financial Transformation Programme. This is why the Treasury and Resources Department will be wholeheartedly supporting the Policy Council's January 2013 States Report. If the required expenditure restraint is not delivered, increases in existing taxes and charges and/or the introduction of new ones will inevitably be required in order to address the structural deficit in our public finances. It is therefore imperative that Departments remain within budget and that momentum is maintained on delivering the FTP Targets.

The second underlying principle, is that it is essential to maintain Guernsey's competitive business environment as a facilitator of economic growth. Whilst this Budget Report does contain proposals to extend the 10% intermediate tax rate to fiduciary and some insurance business, this broadening of the tax base has not resulted in any industry opposition. It continues to maintain Guernsey's competitive position in the funds and banking industries vis-a-vis our closest competitors. In a tough economic environment, we have also opted not to burden business with further, above inflation increases in TRP or the duty on fuel.

It's very pleasing that Guernsey's Zero-Ten regime has been formally confirmed as EU Code Group compliant. The importance of this cannot be underestimated. This is highlighted by the recent European Commission Communication on tax evasion. This used Code Group compliance as a positive criterion to determine good governance of 'third country' jurisdictions, such as us. The wisdom of the 'wait-and-see' approach we adopted, has also been proven by the latest harmful assessment of Gibraltar's current regime.

Economic growth will, obviously, greatly assist in reducing the budget deficit and generating surpluses. By way of example, 1% economic growth should result in a £3million real terms increase in revenue income - mainly through increased income tax receipts as jobs are created and individuals and businesses experience growing incomes. In a difficult global economic climate, Guernsey has been no exception to the general trend of no or slow growth - although we do remain in a better position than could reasonably have been expected given the high proportion of GDP generated by the finance sector. Following two years of recession in 2009 and 2010, our economy is estimated to have achieved 1% real growth in 2011 and although the economic growth forecast for 2012 has been revised to 0%, it is encouraging that the forecast for 2013 is 1.3%. The inflation measure, RPIX, has been around the target level of 3% - and present forecasts anticipate it remaining at that level into 2013.

The third principle underlying the Budget is that the Treasury and Resources Board fundamentally believes that, as far as practicable, the tax burden should be equitable, appropriate and reasonable. As a direct result of the reduction of some £100million in corporate tax receipts, following the introduction of Zero Ten Tax in 2008 is that, the proportion of taxes derived from individuals has increased. This was an entirely predictable outcome. The proposed extension of the 10% intermediate Income Tax rate will, it is estimated, raise £12million per annum and partially readdresses the balance.

However, the 2013 Budget Report also announces that the Treasury and Resources Department, working with the Social Security Department, will carry out a review of all taxes, duties and contributions which government imposes on islanders - with a view to providing a greater degree of equity within the system. The close collaboration with the Social Security Department is essential. Particularly in considering whether there is a more appropriate model, which could address the current separation of personal income tax allowances and social security benefits. This review will also consider the appropriate level of property taxation in the tax system to encompass both TRP and Document Duty.

It is intended that a comprehensive public consultation will be carried out during the first part of 2013, with preliminary feedback produced during the summer. It is intended that a direction of travel and any initial proposals for changing the existing system will be included in the 2014 Budget Report next October. A full report is planned for 2014.

In advance of this review, and recognising the squeeze which hard-working families have experienced for a number of years, in a change of policy from recent Budgets, the proposals in this Budget Report in respect of rates of excise duty on fuel, alcohol and TRP are just to maintain their real value - i.e. to only increase them by the rate of inflation. Rates of duty on tobacco are proposed to increase by 6% - a real terms increase of 3% which follow the States direction included in the Tobacco Strategy. A majority of the Board, will be opposing Deputy Burford's tobacco excise duty amendment for a number of reasons, on which I will expand on during debate on that amendment - but not least because it is outside the Tobacco Strategy.

It is also proposed that income tax allowances are increased to keep in line with the anticipated rate of inflation.

The Department is pressing ahead with the introduction of the Share Transfer Duty regime which was approved in the 2012 Budget Report. We hope to return to the Assembly with a States Report in 2013.

I shall give a very brief summary of the forecasts for 2012 and 2013.

In 2012, the deficit is expected to be £31million which is £4million more than anticipated - although both these numbers will increase by a further £1m if HSSD's States Report is approved. The larger deficit is due to a fall in income tax receipts - largely in the banking sector. Overall, expenditure is expected to be in line with budget. Additional expenditure by Health and Social Services Department and the Social Security Department, plus provision for the fraud are offset by underspends by other Departments - just to clarify this is underspends after delivering on FTP Targets, and delays in projects which had been prioritised for additional funding within the States Strategic Plan.

In 2013, the deficit is anticipated to be £17million - the improvement over 2012 is mainly due to the 2013 FTP Targets and a net increase in income tax receipts, with the £12m additional income from the extension of the 10% income tax rate being partially offset by £4m from the effect of the repeal of the deemed distribution provisions.

The 2013 Cash Limits total £360.7million. This is a real terms reduction of 3.2% due to the FTP targets and a lower transfer to the Corporate Housing Programme Fund - without these two items the 2013 Cash Limits would have been the same in real terms as 2012. The States are therefore achieving the objective - within the Fiscal and Economic Plan - of a real terms freeze on aggregate States revenue expenditure. All Departments and Committees submitted budgets within Cash Limit. It should also be noted at paragraph 4.17, that HSSD has been allocated an additional £1m in recognition of cost pressures arising from medical inflation, including the costs of off-island treatment.

At this point, I should like to thank and commend the Housing Department for reviewing the overall medium term funding requirements for the Corporate Housing Programme. They have concluded that the annual transfer from General Revenue can be reduced by £2million a year from 2013. In addition, I am pleased to report that the transfer of responsibility for wastewater from General Revenue to Guernsey Water has resulted in a total annual reduction of £2.8million in the revenue and capital requirements of the Public Services Department.

There is a Budget Reserve of £11.3million in 2013 (as against £6.6m in 2012.) Although this is a substantial sum, the Treasury and Resources Department believes it absolutely imperative that a Budget Reserve of this size is retained. There are three main strands to the Budget Reserve:

· Firstly to fund any pay awards - departmental budgets will be adjusted once the remaining 2012 pay awards are concluded and any 2013 pay awards are settled.

· Secondly for transfers to routine capital allocations - the amount recommended for routine capital allocations in 2013 is lower than in previous years - and a provision has been made in the Budget Reserve, as there are a significant number of capital projects that may be progressed in 2013 but, at this stage, their timing or cost is not known, with any degree of certainty.

· Thirdly, to fund variations in formula-led expenditure, increases in formula determined grants, or any unanticipated or emergency expenditure where there is a clear business case and any demand or cost pressures - including, importantly, those arising from the timing of the delivery of FTP benefits. Clearly, Departments are expected to, where possible, reprioritise existing budgets to fund any non-formula led expenditure pressures; but it is recognised that this is not always possible and so a request for funding from the Budget Reserve should be made before any expenditure commitment is incurred. A specific example of a possible expenditure pressure that was brought to the Department's attention by the Health and Social Services Department during the Budget's preparation, relates to unpredictable spending under the Children Law.

It is for these reasons that we believe that the substantially larger Budget Reserve is warranted in 2013. And because it is already so much larger to take account of spending pressures in year, we will be strongly resisting Deputy Adams unnecessary amendment to seek to establish a further Budget Reserve, for HSSD alone.

The portion of the Contingency Reserve allocated to the Tax Strategy is projected to be £79million at the end of 2012 and £66million at the end of 2013. Although the financial position anticipated within this Budget Report, is slightly less favourable than that included in the last States Strategic Plan, it is still expected that the total transfers required from the Tax Strategy component of the Contingency Reserve, will be substantially less than originally anticipated - and the Reserve should be sufficient to achieve a balanced budget, without introducing new taxes, provided of course - as I have said - all departments deliver on the States commitment to the Financial Transformation Programme.

Moving to the Capital Reserve, I am pleased that following a review of its asset portfolio and its capital requirements in the context of the Company's future strategy and funding needs, Guernsey Post Limited has concluded that it is appropriate to return £5million to the States of Guernsey in the form of a buyback of shares. It is recommended that this one-off receipt of £5million is appropriated to the Capital Reserve.

All of the major projects in the capital programme approved in October 2009 are now in progress with the exception of the Adult Acute Mental Health Facilities - or the Mental Health and Well Being Centre - and HSSD is intending to submit a States Report for debate in the early part of 2013. In 2012, the estimated expenditure on capital projects is expected to have been £59.7m; in 2013, it is anticipated to be £61m with an additional £13m of routine capital expenditure. This equates to approximately 3.9% of GDP as against a 'norm' assumed in the Fiscal Framework of 3%. The total estimated cost of the programme has reduced by £11million to £205million. The balance on the Capital Reserve at the completion of the current programme is estimated to be £40million - and this will be available for prioritising as part of the 2014-2017 capital programme.

The development of the Island Infrastructure Plan will identify what Guernsey needs in terms of structures and facilities to deliver current and future services and policies; the Strategic Asset Management project will identify the States corporate land and property requirements, both now and for the next two decades. Both of these projects are facilitating long term strategic planning which will underpin and inform the development of the capital prioritisation process. It is for this reason - among others that again I will expand on during debate - that we will oppose Deputy Sillars' amendment.

Finally, I should like to mention the recommendation to establish a Strategic Development Fund, with a transfer of £3million, to facilitate significant strategic policy developments - fiscal, economic, social or environmental - which are in line with agreed SSP objectives and lead to the significant long-term transformation in the delivery of services or, produce substantial new or enhanced growth for the economy and revenue for the States. The recommendation is simply a recognition that there needs to be a mechanism to enable significant strategic policy developments in the community's interests.

Sir, I started by saying that this was a 'cautious' Budget. We could have taken more aggressive steps to reduce the fiscal deficit faster by raising taxes. Guernsey's economy and public finances whilst fragile, compared to many economies are in relatively good shape. But we cannot be complacent. The risks are all on the downside: that the economy underperforms; that revenues fall short; or that we fail to deliver on FTP targets. As Professor Geoffrey Wood concluded in his recent Annual Independent Fiscal Review, "Failure to achieve the full savings of the FTP is the key risk to deficit reduction." It is for this reason that caution is appropriate and so Sir I commend this Budget to the States.